Sunday, March 11, 2012

Costs key as investors seek gold on seabed

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Operating costs seen as main hurdle

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High grades of ores could compensate for costs

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Nautilus Minerals to mine commercially by end-2013

By
Harpreet Bhal

LONDON, March 9 (Reuters) - Touted as the mining
world's next frontier, its attractiveness riding on high ore grades and
dwindling metal supplies elsewhere, seabed mining will have to prove it can
keep costs low to win over mainstream investors.

While the diamond industry has been mining off the
Namibian shoreline for years, Toronto-listed Nautilus Minerals is expected to
be the first commercial operation to extract metals such as copper and gold
from the seabed.

Some analysts say the move could transform the
mining industry in the way off-shore drilling gave access to new deposits in
the oil and gas sector in the 1970s. But keeping operating costs low will be
crucial to seabed mining's success, they warn.

Seafloor mining comes at a critical time for the
industry. Copper ore grades are declining, forcing firms to mine in riskier
areas, costs are rising and new projects have been slow to catch up with demand
from emerging economies.

A Reuters survey late last year showed long-term
price forecasts for copper have jumped by a fifth compared with the previous
year on strong demand from emerging markets and rising production costs in a
world of tight supply.

Long-term, or incentive, price forecasts are used to
evaluate the feasibility and potential profitability of future projects.

Gold is also seen as lucrative to mine, with spot
prices trading up almost 9 percent this year after hitting an all-time high at
$1,920.30 an ounce in September 2011.

Founded by geologist-turned-journalist Julian Malnic
in the late 1990s, Nautilus has permission to explore massive sulphide deposits
in the floor of the Bismarck sea off the coast of Papua New Guinea for copper,
gold, zinc and silver.

The firm is backed by high-profile investors,
including global miner Anglo American Plc and Russia's largest iron ore miner
Metalloinvest, controlled by Arsenal football club shareholder Alisher Usmanov.

"They (shareholders) recognise that if it works
it's going to be a game changer for the mining industry in many respects
because there is a lot of this stuff out there on the ocean floor," Numis
analyst Andy Davidson said.

"It's almost a punt for those guys and I think
that's the way a lot of investors look at this. This is a high-risk, potentially
very high-reward speculative play."

COST
IS KEY

Nautilus aims to start producing at Solwara 1 in the
Bismarck sea, at a water depth of some 1,600 metres, in late 2013. It hopes to
produce around 80,000 tonnes of copper and 150,000 ounces of gold per year,
equivalent to a small mine.

"The initial resources at Solwara 1 will allow
us to produce for two-three years and we will then move the production system
to the next resource," Nautilus Chief Executive Steve Rogers told Reuters
in an interview.

"Unlike land-based mining where you have got to
completely build new infrastructure, one of the attractions here is we can move
the vessel around in a very short space of time and begin production... at a
low incremental cost."

Cost is an issue that analysts said will be key to
the long-term viability of seafloor mining, including ore transportation costs
if mining areas are located further away from land such as off the Eastern
Pacific, between Hawaii and Mexico.

"You need to have some sort of offshore
processing facility, which will be hugely expensive, or else you're
transporting huge tonnages of material and the freight costs would be
prohibitive," said Christine Meilton, principle consultant at CRU.

But the Solwara 1 project could be spared some of
the higher transportation costs, Meilton said as the area is close to land.

Energy costs involved in lifting the ore and
separating it from the water, will also be a factor closely monitored by
analysts, in relation to every tonne of copper, or ounce of gold recovered.

Potential higher costs could be counterbalanced by
higher grade ores as analysts estimate copper deposits on the seafloor are
around 7 percent, compared with grades around 0.6 percent on land.

Gold grades of over 20 grammes a tonne have been
discovered in some parts in Solwara 1, according to Nautilus.

"If it works, with a fairly reasonable
contingency to the guidelines that they (Nautilus) have put out, it should be
very cost efficient compared to land-based operations," said Numis'
Davidson said.

"It will be relatively high costs in absolute
terms on a per tonne of ore lifted, but because the ore is so rich in metals
and the grade is so high, on a per unit of contained metal basis its comparable
and cheap."

ENVIRONMENTAL
OPPOSITION

The high ore grades for copper on the sea floor is
one of the main draws for seabed mining, said David Russell, Director of Global
Resources at Ernst & Young, with shallow seabeds the best areas to mine for
keeping costs low.

"It is much easier to operate in areas where
there is relatively shallow seabed but would you be able to get permission to
mine them?," he said.

Large-scale permission to mine on the sea floor is
likely to face opposition from environmental campaigners and indigenous rights
groups, such as those that already exist in Papua New Guinea, New Zealand and
Australia among others.

Last week, Australia's Northern Territory imposed a
moratorium on seabed mining in its coastal water until at least 2015, where
large manganese deposits are believed to exist, to review potential risks.

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